McKesson VP: Slowness Cost Memphis

By Bill Dries

When McKesson Pharmaceutical Co. went looking for another redistribution center, it wanted 70 acres of land for what wound up being a $135 million investment, the largest capital investment made in the history of the health care software, automation and services company.

There were three sites in Memphis McKesson considered in 2009.

The only one of the three that had that much acreage was a tract of land near the recently opened Northridge distribution center Nike built in Frayser.

The impact of a second major distribution center in an area already blighted before the current recession would have been incalculable.

McKesson rejected the Frayser site because of safety concerns, said Douglas Pace, operations vice president for the McKesson Redistribution Center in Memphis, soon to be in Olive Branch.

“The security of our employees coming in at 2 or 3 o’clock in the morning, going out at 6 or 7 at night, two-and-a-half miles to get to Interstate 40 was a major consideration in not selecting that property,” Pace told the monthly luncheon of the Memphis chapter of the Society of Industrial and Office Realtors.

Pace said he came to the Tuesday, March 27, gathering in East Memphis, sponsored by The Daily News, to talk about the new Olive Branch plant, which is scheduled to open in the fall.

He acknowledged later that the talk to a group of 50 strayed into a critique of how Memphis lost the project to Olive Branch.

The McKesson center in Olive Branch, next to the Olive Branch airport, is nine buildings under one roof including office space.

Because of the value of some of the pharmaceuticals McKesson distributes, it has elaborate security. The pharmaceuticals are also stored under special conditions that require regulated and constant temperatures as well as failsafe measures for power outages. And there are elaborate fire safety precautions being built into the plant as well as seismic measures. Some shipments are moved by “automated guided vehicles” that cost $500,000 each.

Pace credited state government officials, including then-Tennessee Gov. Phil Bredesen for being “aggressive” in their response to what amounted to a competition on both sides of the state line.

“They knew their stuff and they put together a very aggressive model,” he said of Bredesen’s administration. “When it went to the city of Memphis, it went to a slow walk.”

He referred specifically to requirements to “be able to get over the hurdle” and win approval of a payment-in-lieu-of-taxes (PILOT) from the old Memphis-Shelby County Industrial Development Board. That included a $45,000 diversity plan “that went on the shelf and we never used it.”

“When we were dealing with Mississippi, there was no such thing,” Pace added. “If you’re a small-business person in the city of Memphis, I don’t know how you do it.”

Pace said the city’s process was not only lacking when compared with Olive Branch and Mississippi. He said the city’s process failed comparisons to numerous other cities the San Francisco-based company has dealt with.

“It’s nowhere near as egregious as Memphis,” he said.

McKesson has offered all of the employees at the Memphis distribution center in Hickory Hill jobs at the Olive Branch plant and the company will pay what those employees have to pay in Mississippi’s state income tax “in perpetuity until they retire.” Those hired after the fall move to Olive Branch do not get the same offer.

Pace’s remarks are the first public statements the company has made on why Memphis lost. But McKesson’s displeasure with the process for applying for economic development incentives in Memphis was apparent behind the scenes.

When McKesson and Olive Branch leaders formally announced the future move to Olive Branch in May 2010, it was a major factor in Memphis Mayor A C Wharton Jr. and later Shelby County Mayor Mark Luttrell announcing an overhaul of the local economic development apparatus.

McKesson sought tax breaks and incentives for a project that wasn’t going to immediately expand its workforce of 813 in Memphis. Its application for a PILOT couldn’t “promise job growth in the near term” – one of the criteria.

With lots of cajoling and prompting from Wharton in particular, the IDB criteria was changed to make job retention a consideration when a company makes an investment in its facilities of at least $10 million.

The long-term result of the push by both mayors for a faster and more streamlined process was putting most of the separate incentive boards and other public-private players under EDGE – Economic Development Growth Engine.